Reflection on the Coca-Cola bottling merger Tatenda Zengeni he merger between Coca-Cola Sabco’s African bot- The beverage industry has unique characteristics which can tling operations and SABMiller was recently approved raise barriers to entry for new firms. Soft drink manufacturing T by the COMESA Competition Commission, while it is involves three stages. First in the chain are syrup producers still under review in some other countries such as South Afri- who produce the syrup that is later used by bottlers. The bot- ca. SABMiller is Coca-Cola’s biggest bottler in Africa with tlers mix the syrup with other ingredients and pack the prod- operations in 15 African countries.1 The merger involves uct into different sizes to suit consumer needs. Once bottled, the soft drinks may be distributed through a variety of differ- SABMiller acquiring Coca-Cola Sabco’s bottling operations in ent channels to the final consumer.11 Some of the drinks are Ethiopia, Kenya and Uganda.2 The bottling assets will be sold to middlemen such as wholesalers and some are sold jointly housed in a new company called Coca-Cola Beverag- directly to the consumer.12 es Africa. When considering the soft drink value chain above, competi- The merged entity will account for 40% of Coca-Cola’s total tion concerns most often arise in the distribution and retail volumes sold on the continent and will create the continent’s legs of the chain. This flows from the fact that dominant pro- 3 biggest bottler of soft drinks. This article highlights some of ducers such as Coca-Cola and Pepsi, who have invested the likely competition concerns that arise from this merger heavily in marketing and distributing their product, generally taking into account the market structure of the beverage in- exclude competitors from using their distribution networks dustry on the continent and lessons from the European Un- and the in-store coolers and fridges in which their drinks are ion. displayed. In fact, a number of distribution cases in the soft drinks market have been investigated in different jurisdictions Market structure and competition in the region including Mexico, Chile, and the European Union. In the Eu- Coca-Cola and Pepsi dominate the soft drink market globally ropean Union, Coca-Cola had exclusive agreements with and in Africa.4 Pepsi re-entered the Kenyan market in 2010 distributors that directly prevented customers from being able 13 (after having exited the market in 1970) and has recently in- to offer competing brands. Moreover, competing suppliers vested in a new bottling plant in Nairobi.5 Its entry has offered could also be denied access to outlets by virtue of the effects competition to Coca-Cola where Pepsi is selling its 350ml of Coca-Cola’s financing agreements and technical sales bottle at the same price as Coca-Cola’s 300ml.6 equipment arrangements on beverage coolers and fountain dispensers. The EU Commission entered into a commitment In most countries, competition is largely between the two agreement with Coca-Cola in 2005 restricting certain exclu- firms, although in some countries such as Uganda there are sive agreements, tying practices and rebates between Coca- a number of smaller producers in operation as well. In Ugan- Cola and distributors and shops which included freeing up da, the entry of three new competitors; Riham, Fizzy and 20% of space in its coolers to competitors.14 Azam (a brand owned by Tanzanian privately-owned firm Bakhresa Group which began producing carbonated drinks in The merger marks a huge step towards convergence in the 2011), led to increased competition with Coca-Cola and beverages industry, given that SABMiller is also a major play- Pepsi who had enjoyed a duopoly in the sector since 1996 er in beer production and distribution in Africa and globally, in after the collapse of Creeps.7 Competition led to price wars in which there have been prominent competition investigations the sector as companies competed for a share of the mar- as well. For example, SABMiller was accused of exclusionary ket.8 conduct involving independent (downstream) wholesalers/ distributors in South Africa, although they were found by the The Ethiopian market has seen large investment by the two Competition Tribunal not to have contravened the Act.15 In leading multinational companies through their investment addition, the merging parties are potential rivals in each oth- companies, East African Bottlers and Mahu Soft Drinks In- er’s markets, as SABMiller already supplies non-alcoholic dustry, owned by Coca-Cola and Pepsi, respectively.9 In gen- beverages such as Appletiser and could be a bottler for other eral, the increase in investment in Africa is as a result of in- soft drinks suppliers. Similarly, the Coca-Cola bottlers could creasing incomes and a rising middle class in the continent, be potential bottlers for beer rivals to SABMiller. which is expected to boost consumption of soft drinks.10 The consolidation of Coca-Cola’s business in Africa can be Conclusion viewed as an effort to fight increasing competition from the The nature of the beverage industry favours companies that company’s long-time competitor, Pepsi, and other new en- have high capital outlay, established brand names and ex- trants in some domestic markets. The merger is particularly pansive distribution channels. This poses a threat to new en- important given the nature of the soft drinks market which trants who do not have established brands and distribution exhibits significant economies of scale in bottling and, im- networks, although these concerns may be pre-existing and portantly, in distribution, as explored below. as such not merger-specific. To the extent that distribution Competition in beverage markets and marketing arrangements with retail and wholesale outlets 7 will be applied by the merged entity in country markets throughout the continent, the decision to approve the transac- Zambia CCPC issues new merger guidelines tion may have significant adverse consequences for rival manufacturers, including new entrants that may not have strong distribution systems of the incumbents. This is espe- cially concerning if arrangements with the merged entity tie Mohlahlego Cornelia Matumba up large proportions of distribution capacity in individual country markets. The Competition and Consumer Protection Commission (CCPC) of Zambia released its guidelines for merger regula- Notes tion in August 2015. This is important for providing clarity on the process for merger regulation in Zambia and provide the 1. ‘The Coca-Cola Company, SABMiller and Coca-Cola commission and stakeholders with a structured and transpar- Sabco to form Coca-Cola beverages Africa’ (27 Novem- ent framework for these assessments.1 ber 2014). SABMiller Media Release. Key features of the guidelines relate to what constitutes a noti- 2. COMESA (2015). ‘Decision of the Sixteenth Meeting of fiable merger wherein the Commission considers change of the Committee of Initial Determination Regarding the control, local nexus and threshold. Proposed Merger between Coca-Cola Beverages Africa and the Coca-Cola Sabco Proprietary Limited’. Mergers that occur outside of Zambia but have a local 3. Thomas, N. ‘SABMiller agrees $3bn Coca-Cola bottling connection (local nexus) either through their presence in deal’ (27 November 2015). The Telegraph. the Zambian markets through export sales or presence of their subsidiaries, constitute a notifiable merger.2 4. Nair, A. and Selover, D. (2012). ‘A study of competitive dynamics’. Journal of Business Research, Vol. 65, p. 355 Threshold for notification of a merger is a combined annu- -361. al turnover or assets of ZMK 15 000 000. 5. Otini, R. ‘Pepsi switches on Nairobi soft drinks production plant’ (1 January 2013). Business Daily. The notification fee is set at 0.1% of the parties’ combined turnover or assets, whichever is higher. 6. David, H. ‘PepsiCo replaces Kenya chief in battle with Coke’ (19 January 2014). Business Daily. 7. Ladu, I., M. ‘The fights in Uganda’s soda business’ (24 February 2015). Daily Monitor; and Bakhresa Group Notes website. 1. Mbale, R. ‘CCPC finalises guidelines for merger regula- 8. Kula Bako, F. ‘Price war among soft drinks manufactur- tion’ (20 August 2015). Zambia Daily Mail. ers hurts profits’ (24 April 2014). Daily Monitor. 2. Competition and Consumer Protection Commission 9. Zhuwakinyu, J. ‘Coca-Cola’s $60m Ethiopian plant to (CCPC). (2015). CCPC guidelines for Merger Regulations. quadruple production’ (7 December 2012). Engineering News. 10. See note 1. 11. Changlab Solutions. (2012). ‘Breaking down the chain: A guide to the soft drink industry’. 12. See note 10. 13. European Union. (2005). ‘Competition: Commission makes commitments from Coca-Cola legally binding, in- creasing consumer choice’. 14. See note 13. 15. Kaziboni, L. ‘SA Tribunal finds no case against SAB dis- tribution’ (August 2014). CCRED Quarterly Competition Review. 8 .